It’s Boeing’s Dow; We Just Live In It

We will withhold judgment on today’s US equity market selloff for a few reasons:

After the rush into equities this month, it makes sense to expect a modest pullback as we roll through the final days of January. As Plautus said, “Moderation in all things is the best policy”. Not one of his knee-slappers, but true nonetheless.

Friday’s ramp made little sense (who says “I have to buy more stocks at all time highs into an end-of-week close?”), so a partial reversal on Monday isn’t surprising.

US stocks are going to have to contend with higher long-term interest rates this year, but everybody knows that.

The offsetting factor to this concern is earnings growth. Valuation math says discount rates and growth rates hold equal sway. Since market psychology is now locked on higher earnings expectations in 2018, all these have to do is outpace rising rates to keep equities in bull market mode. (Remember that the equation for the value of an asset is Coupon/(Discount rate minus growth rate).

Instead, we want to do a quick forensic dive into what has driven the Dow Jones Industrial Average this month. The Average is up 1,720 points, or 7.0% on the year. What’s driving that? Over half the gains boil down to just 5 stocks:

Boeing: Up 15.6% on the year, and responsible for 341 Dow points (19.8% of the total)

UnitedHealth Group: +12.2% on the year, adding 193 Dow points (11.2%)

3M: +8.8% on the year, adding 144 points (8.3%)

Goldman Sachs: +7.0% on the year, adding 118 points (6.8%)

Home Depot: +8.1% on the year, adding 106 points

Add those up, and they represent 54% of the Dow’s advance in 2018. A few takeaways:

#1: Boeing is a very large (perhaps dangerously so) part of the Average. It has doubled over the past 12 months, and with its $340 stock price it is now 8.88% of the price weighted Dow. That is more than the weightings of Apple, Microsoft and Amazon in the S&P 500 – combined. Yes. Combined.

#2: The Dow’s performance shows how much less Tech-centric US equity markets have become in 2018. Take all the Technology names in the Dow (Apple, Microsoft, IBM, Cisco and Intel) and together they only add 195 points to the Average’s performance this year. Yes, that’s partly due to their lower share prices (and therefore weighting) relative to other names. But remember that the Dow is beating the S&P 500 YTD as well.

#3: Only 2 Dow stocks are down on the year: GE and Apple. Their collective impact is just 15 points. That is impressive breadth, at least in this market measure.

We’ll close this discussion with a question: when does GE get kicked out of the Dow? Yes, the company has a history here; it was added to the Average back in 1907. But with its well-known problems and a potential breakup in the wings, it may no longer fit the Dow committee’s definition of a marquee American company. And with its current weighting of 0.4%, it is already a trace element in terms of impact.

What would the Dow committee put in its place? Let the guessing games begin…